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What Is Home Equity & Why Do I Need It?
Homeowners hear this line a lot: “You need to build up your home’s equity!” But what is home equity and why is it so important?
Here is what you need to know about home equity and why it is such an important part of being a homeowner.
The Amount Of The Home’s Value That You Own
Simply put, home equity is the amount of the home’s value that you officially own. The down payment you put towards the home on purchase is counted towards your home equity. For example, if you place $20,000 down on a home of $200,000, you can simply calculate that your home equity is $20,000.
When your home appreciates in value, you can use this simple equation to calculate your home’s equity:
Market value – amount still owed to the bank = home equity.
For example, $320,000 market value minus $100,000 amount owed equals $220,000 in home equity.
Take Out HELOC & Home Equity Loans
When you have built up enough home equity you can take out a home equity line of credit (HELOC), which essentially acts as a credit card where you can borrow any amount up to your loan limit. This loan is taken out when you wish to make repairs or improvements to your home, turning “your home into cash”. This is revolving credit.
A home equity loan is also known as a second mortgage using your home as collateral, giving you a fixed amount of money to use, rather than the revolving credit of a HELOC. Remember that these two options are not the same.
Get Your Home Refinanced
Home equity is also a factor in getting your home refinanced. When you refinance your home, you are essentially replacing your original loan with a new one. As such, you will need to build up enough home equity in order for your home to be used as an asset during the refinancing process.
Build Up Your Home Equity
You can build up your home’s equity in a number of ways:
- Making extra mortgage payments each month
- Improve your home value with maintenance & improvements
- Make a larger down payment